KARACHI: The interest rate is now at 13 per cent after the central bank slashed it by 200 basis points on Monday in line with what most financial experts foresaw, but still below industry and market expectations.

Aggressive and unprecedented cuts from 22pc to 13pc, totalling 900bps were made by the State Bank of Pakistan (SBP) in the secondhalf of calendar year 2024 following an extended period where the interest rate remainedstable in an effort to rein in inflation.

Trade and industry circles, however, were calling for a decline of up to 400-500bps toboost economic growth with cheaper money.

However, SBP`s Monetary Policy Committee (MPC) argued that the core inflation is static at 9.7pc, whereas the inflation expectations of consumers and businesses remained volatile.

The committee found that headline inflation declined to 4.9pc in November, a deceleration that was mainly driven by a continued decline in food inflation, as well as the phasing out of the impact of the hike in gas tariffsfrom last November.

Due to higher core infiation and the volatile inflation expectations of consumers and businesses, the committee assessed that the inflation may remain volatile in the near term before stabilising in the target range.

Backing its approach of measured policy rate cuts, the committee also said that growth prospects had somewhat improved and it had managed to keep inflationary and external account pressures in check, while supporting economic growth on a sustainable basis.

The committee assessed that the impact of the cumulative reduction in the policy rate from June 2024 was beginning to unfold and would continue to materialise over the next few quarters.

`The real policy rate remains appropriately positive to stabilize inflation within the target range of 5pc-7pc,` it said.

Inflation For the uninitiated, headline inflation refers to the raw figure that renects changes in the consumer price index (CPI) throughout the entire economy, which is measured through a bas-ket of essential goods and services. It differs from core inflation, which is CPI-adjusted to exclude food and energy prices, which fluctuate and are thus considered volatile.

According to the MPC report, headline inflation had eased to 4.9pc and this decline was mainly driven by a favourable base ef feet from gas prices, along with the continued moderation in food inflation and benign global commodity prices.

Excluding food and energy from the CPI basket means all other items like iron to steel, cement to machinery etc, are facing the high prices of 9.7 per cent compared to 4.9 per cent CPI in Nov 2024.

In case of high core inflation, economic growth would remain slow as the cost of doing businesses would be higher.The headline figure, the MPC estimated, may come down further in the coming months, with FY25 inflation being projected to average substantially below the earlier forecast range of 11.5pc13.5pc.

`The inflation outlook is susceptible to multiple risl(s, including additional measures to meet the revenue shortfall, resurgence in food inflation and an increase in global commodity prices,` the MPC said.

Real sector The data indicates improved prospects for economic growth; the MPC expects real GDP growth in FY25 to remain in the upper half of the projected range of 2.5pc3.5pc.

In the agriculture sector, downside risks to over-all crop outlook have somewhat subsided, while activity in the industrial sector is gaining further traction, the report said.

Key large-scale manufacturing sectors such as textile, food, automobiles, petroleum and tobacco were already showing strong growth into the first quarter of FY25, it added.

External sector The current account situation continued to improve and posted a surplus of $200 million during July-October FY25, driven by robust workers` remittances and strong export performance.

Exports grew by 8.7 per cent, said the report.

A sustained uptrend in workers` remittances and exports, along with favorable international commodity prices, are expected tokeep the current account deficit near the lower levels of the projected Opc1pc of the GDP in FY25, the MPC said, adding that this will enable the SBP`s forex reserves to surpass $13 billion by June 2025.

Fiscal sector However, the committee noted that revenue growth was substantially lower than what was required to achieve the annual tax collection target and admitted that achieving the targeted primary surplus would be a challenge. According to the report, considerable efforts and additional measures would be required to meet the annualrevenue target.

Money and credit Bank lending to the private sector and non-banking financial institutions(NBFIs) accelerated amidst the easing financial conditions, and their efforts to comply with minimum advance-todeposit ratio (ADR) thresholds by end-December 2024, the MPC said.

Credit to private sector businesses had also increased substantially, with consumer financing also recording a noticeable rise in Oct 2024, ever since the policy rate begun its downward trajectory.

Although the MPC said that bank lending had increased in FY24, but the reality is that banks have parl